A paused Bitcoin price rally has increased its probability of undergoing a major pullback, as per independent analyst Vince Prince.
The TradingView.com contributor said Monday that there is a 35 percent chance that the Bitcoin price falls in the coming sessions, citing a textbook technical indicator that foresees bearish reversal patterns.
Dubbed as Head and Shoulder, the pattern appears during an asset’s uptrend. Traders confirm it when they see the formation of three peaks atop a support-like baseline. The middle peak is taller than the other two, making it look like a head hanging atop two shoulders at each side.
The H&S patterns typically end up in a breakout below the baseline, with a downside target underneath by as much as the structure’s maximum height. Mr. Prince spotted Bitcoin forming a similar technical setup, with the left shoulder and head fully confirmed and the right shoulder partially established.
“Bitcoin is trading already in overbought zones,” he added. “This does not mean it [cannot] move higher and form new highs. However, the perspective should not be underestimated in any case. Bitcoin is moving into zones where a swift reversal and change in direction can establish more easily.”
If valid, the H&S pattern risked putting Bitcoin about $1,600 below its baseline (the height between the peak and the support). The yellow range in the chart above shows the ideal H&S breakout target range.
Overleveraged Risks in Bitcoin
Mr. Prince’s bearish outlook on Bitcoin received involuntarily support from the cryptocurrency’s futures market. According to Glassnode, the average “funding rate” across all the Bitcoin exchanges rose to levels that suggested traders may have become overleveraged via perpetual contracts.
Measured every eight hours, the funding rate shows the cost of holding a bullish contract, i.e., a Long position. A positive reading indicates that bulls are paying bears. That raises the value of the perpetual contract above Bitcoin’s spot rate. Therefore, a very high funding rate signals leverage being excessively biased in favor of bulls. It is an overbought condition.
Bitcoin is in a weird spot
futures funding rates = very overbought, very overheated
RSI on lower time frames = oversold, esp 4h
Price currently at support, resilient above $18k
— Joseph Young (@iamjosephyoung) November 22, 2020
An event of a pullback in the spot market can lead to mass Long liquidations, which may lead to more price drops and higher volatility.
The Upside Take
But Mr. Prince also believes in a limited corrective downtrend. He noted that Bitcoin could find support at the H&S neckline to bounce back higher — and invalidate the entire trend reversal theory altogether.
“As Bitcoin has still solid supports [near] the 65-EMA and the blue horizontal support, the breakout has a greater possibility of 65%,” Mr. Vince added.
His upside outlook envisioned Bitcoin above $19,000.